Growth has been less strong than it seems. The misreading has complicated policy, Pg11

Key Highlights

• Economic experts estimate that India's actual GDP growth between 2011-12 and 2023-24 was likely 4% to 4.5%, significantly lower than the official figure of 6%.
• The overestimation is attributed to using formal sector data as a "proxy" for the informal sector, which was disproportionately hit by shocks like Demonetisation, GST, and Covid.
• The use of inappropriate price deflators—specifically the Wholesale Price Index (WPI) to deflate services—led to a persistent overstatement of real growth as oil prices fluctuated.
• Conversely, growth in the pre-2011 period (the "heady years" of 2003-2010) was likely underestimated by 1% to 1.5%, suggesting that era was even stronger than current records show.
• This divergence explains "macroeconomic puzzles" such as why private investment and employment remained tepid despite supposedly world-beating growth rates.

Detailed Insights

• The Informal Sector Blind Spot: Since the informal sector accounts for over 45% of the economy, the methodology’s failure to capture its unique struggles after 2015 created a serious upward bias in GDP figures.
• The Deflator Problem: To calculate "real" growth, nominal data must be adjusted for inflation. The authors argue that the 2015 methodology relied on price indices that didn't truly capture service prices, causing a "significant misestimation" when global commodity prices crashed.
• Policy Complacency: By presenting a picture of "uninterrupted idyll," the official data may have reduced the government's urgency for reforms. If growth was perceived as already being high, the incentive to change the policy framework was weakened.
• Broken Relationships: Historically, GDP moved in lockstep with indicators like exports, credit, and electricity consumption. This relationship broke down after the 2015 revision, with GDP appearing much stronger than its underlying macro-indicators would suggest.
• Correcting the Record: While MoSPI has introduced a new GDP series, the authors stress that "backcasting" (correcting the historical data) is essential to understand India's true economic trajectory and provide a benchmark for future policy.

Key Concepts Involved

• GDP Deflator: A measure used to strip away the effects of inflation from GDP, showing the "real" change in the volume of goods and services produced.
• Informal Sector: Economic activities that are not officially regulated or taxed; in India, this sector is a major driver of employment but is difficult to measure accurately in real-time.
• Double Deflation: A more accurate accounting method where both outputs and inputs are deflated by their respective price indices to calculate value added.
• Backcasting: Recalculating old economic data using a new, updated methodology to ensure that long-term trends are based on a consistent set of rules.